It if weren’t for limited liability that shareholders of a corporation enjoy, not many people would be willing to engage in multimillion (and multibillion) business transactions. Fortunately for shareholders, LLC members, and partners in a limited liability partnership, having ownership of certain types of businesses allows for limited personal financial liability when it comes to business debts. In other words, shareholders do not have to dip into their personal checking accounts in order to satisfy debts of the corporation.
This is usually the case; however, as with most things, there are special circumstances that warrant an exception. If certain conditions exist and a plaintiff can prove they exist in court, shareholders may be found to be personally liable for lawsuits and judgments against the corporation. This is referred to as “piercing the corporate veil.”
The Three Justifications For Piercing The Corporate Veil
Florida, relative to many other states, is rather business-friendly. Accordingly, courts in the Sunshine State are usually hesitant to allow plaintiffs to pierce the corporate veil. Over the years, the courts have developed a three-pronged test to determine whether or not piercing the corporate veil in a particular case. All three conditions must be satisfied:
- The corporation or business is dominated and controlled by one or a few shareholders to such lengths that the company’s independent status did not exist. A term often used in this context when referring to the alleged wrongdoers is “alter ego” or “alter egos” of the company.
- The shareholders did not adhere to corporate formalities and the corporate structure (form) was used for improper or fraudulent purposes.
- The actions taken by the alleged wrongdoers caused injury to the plaintiff.
What are Corporate Formalities?
Simply setting up a corporation or LLC to enjoy personal limited liability is not enough. Owners of such companies must conduct the business in a certain way. If the owner does not comply with these corporate formalities, the owner as an individual will likely not be considered to be a separate entity from the business. That is what leads to piercing the corporate veil.
Some examples of corporate formalities include:
- Keeping accurate and updated records of the company
- Holding regularly scheduled and special meetings
- Adhering to the common law obligation of exercising fiduciary duties
- Following the corporation’s bylaws
We Can Help Keep Your Business in Compliance
The LLC structure is one of the most popular ways for entrepreneurs to set up their companies, mainly due to the limited liability for their personal finances. However, you need to keep up with the numerous requirements for keeping that limited liability. The consequences could be more severe than, say, a slap on the wrist from a civil department.
Trembly Law Firm has been helping Florida business owners build upon a solid legal foundation for years. Entrepreneurs have enough to worry about without dealing with legal issues; we gladly handle those. We look forward to setting up a consultation soon so our team can discuss your business goals and objectives.